Best Hedging/Trading strategy ( understand it if u want to make money )

#1
Folks ,

I would like to share my best strategy , Its called gamma trading or scalping. It does work all the time .

What is gamma : Gamma is second order derivative i.e. ratio of change in delta / underlying price .

For e.g. say underlying is Rs 100 and we buy call at 100 Rs which is trading at Rs 5.

Now lets say it has 50% probability of maturing ITM. Lets assume ( for sake of simplicity )

delta model is 0.5 ( it means to hedge your position of buying the ATM call you need to sell 500 shares )

gamma model is approximately .1 ( it means to gamma hedge you need to sell further 100 shares )

IMP TO NOTE : Gamma of buying call or put is always +ve and selling -ve. You will know why later in this post.

Since options are all about dynamic hedging , now if stocks goes down by 10 Rs to 90 Rs

Delta model reduces to say .3 : It means you just need 300 shares to hedge your position . You had already shorted 500 shares so you cover 200 shares .

What does that mean : PROFIT of 200 * 10 = Rs 2000 .

Now next day the share goes up back to 105 and say delta model goes to .6

So now you need to buy (.6-.3)*100 shares == 300 shares

now stock goes back to 100 so delta becomes .4 again ..

again you can book (.6-.4)*100 == 200 * 5 = 1000 RS PROFIT ..

Keep doing it till expiry and just with hedging enjoy your EFFORTS ..

I know lots of questions

1. Why i have illustrated with delta when its gamma scalping
2. How to get these model numbers
3. What vol to chose
4. How and when to hedge ..

will try to post more tomorrow :)

Happy Trading

Cheers
 

psvaja

Active Member
#2
your gamma is long hence if market doesn't move much either side than, you loose as theta is against you. This kind of long gamma stretegies works much better during higher IV period. currenl IVs are near lowest level hence may not work at this time.

Pravin
 
#3
your gamma is long hence if market doesn't move much either side than, you loose as theta is against you. This kind of long gamma stretegies works much better during higher IV period. currenl IVs are near lowest level hence may not work at this time.

Pravin
Well that's partly correct, some stocks have good IV for gamma scalping any way the strategy works best for stocks which have low IV when compared to HV so when mean reversion happens ( normal crossover etc .. ) then trader can scalp some money ....
 
#4
HI Options Guru,

Nice posting but can you explain this concept with a simulated step by step example.

Please make it as simple as so that everyone can understand & benefit out of this.

Thanks - Siva
 

Taurus1

Well-Known Member
#5
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Last edited:

amanfree

Active Member
#7
Folks ,

I would like to share my best strategy , Its called gamma trading or scalping. It does work all the time .

What is gamma : Gamma is second order derivative i.e. ratio of change in delta / underlying price .

For e.g. say underlying is Rs 100 and we buy call at 100 Rs which is trading at Rs 5.

Now lets say it has 50% probability of maturing ITM. Lets assume ( for sake of simplicity )

delta model is 0.5 ( it means to hedge your position of buying the ATM call you need to sell 500 shares )

gamma model is approximately .1 ( it means to gamma hedge you need to sell further 100 shares )

IMP TO NOTE : Gamma of buying call or put is always +ve and selling -ve. You will know why later in this post.

Since options are all about dynamic hedging , now if stocks goes down by 10 Rs to 90 Rs

Delta model reduces to say .3 : It means you just need 300 shares to hedge your position . You had already shorted 500 shares so you cover 200 shares .

What does that mean : PROFIT of 200 * 10 = Rs 2000 .

Now next day the share goes up back to 105 and say delta model goes to .6

So now you need to buy (.6-.3)*100 shares == 300 shares

now stock goes back to 100 so delta becomes .4 again ..

again you can book (.6-.4)*100 == 200 * 5 = 1000 RS PROFIT ..

Keep doing it till expiry and just with hedging enjoy your EFFORTS ..

I know lots of questions

1. Why i have illustrated with delta when its gamma scalping
2. How to get these model numbers
3. What vol to chose
4. How and when to hedge ..

will try to post more tomorrow :)

Happy Trading

Cheers
HOW TO CALCULATE GAMMA AND DELTA PLZ EXPLAIN.:clap:
 

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